Ideas to improve the substantial shareholdings exemption
Pete Miller believes the SSE relief is defective in parts and the current consultation doesn’t address those failings.
Substantial shareholding exemption (SSE) provides a tax exemption for the gain made when a trading company (the investor) disposes of shares in a trading subsidiary (the investee). The other main condition is that the investor must have held at least 10% of the investee’s ordinary share capital for a continuous period of at least 12 months within the two years ending with the disposal.
Miller welcomes the open-minded consultation on reform of the SSE, but says there are three absurdities in the current legislation that should be addressed as part of the consultation process:
A group is needed
FA 2011 extended the SSE rules to allow a company with more than one trade to package that trade into a new subsidiary, which could be sold on and qualify for the exemption. Except that HMRC’s interpretation of the legislation (HMRC manual: CG53080C) is that this only applies to a company that is already a member of a group, and not, as was intended, to single companies with several trades, who would otherwise be forced to set up a group structure in order to subsequently qualify. This issue needs to be addressed.
The above changes to the de-grouping rules made by FA 2011 only apply to tangible assets, not intangible assets. Companies with significant intangible assets, such as post- 1 April 2002 goodwill, can’t package-up their different trades and sell off the resulting trading subsidiary, because the legislation relating to intangible assets doesn’t mirror that relating to tangible assets. It’s absurd!
Not what the law says
The current rules for SSE are set out in TCGA 1992, Sch 7AC, but paragraph 3(3) of that schedule is quite incomprehensible. It is used by HMRC as an excuse to permit SSE to apply when a company disposes of trading subsidiaries or sub-groups while being wound up. But the legislation doesn’t in fact say this. It would be helpful if this particular policy intention was clarified by clear legislative words.
The consultation document presents five options which can be summarised as:
1.A comprehensive exemption for all shareholdings - this would require lots of anti-avoidance rules, so it’s probably not practical.
2.Remove the trading condition test for the company that makes the disposal, which would remove a number of practical problems, especially for large and multi-national groups.
3.Widen the “trading” condition for the investee company to include situations where it is operating a business, similar to the business requirement for incorporation relief (TCGA 1992, s 162).
4.Change the way the trading tests are applied, perhaps look at the trading position of the whole group rather than at the level of individual companies.
5.Change the meaning of ‘substantial shareholding’ so the 10% shareholding is reduced to a lower number, and possibly extend the two-year period to six years.
These options are not mutually exclusive and far more detail is given in the consultation paper.
Other problems concerning SSE are also addressed in the consultation paper such as;
- shareholdings held by corporate partners in a partnership;
- difficulties caused by companies which do not have share capital (e.g. companies limited by guarantee);
- defining the activities of the investee company after disposal;
- how to apply SSE where the vendor company is wound up after disposal.
Overall, Miller is very pleased that HMRC is prepared to open a dialogue on the SSE and hopes that what emerges will be more useful to UK companies than the current regime.
The consultation closes on 18 August 2016. You can respond directly by email to [email protected], or post your views below, which we will consolidate into a response from the AccountingWEB community.
Pete Miller is the senior partner in The Miller Partnership which provides expert tax advice to businesses and other advisers on tricky corporate tax problems and disguised remuneration issues.